The year 2012 closed with the announcement that Tesco will probably exit its US business, Fresh & Easy. Obviously it will sell it or parts of it if it can. It may contribute assets to a joint venture or may just put a lock on the door. Although Tesco claims some have expressed interest, it noticeably did not reassure investors that it would not have to wind up writing a check to exit the business.

The year 2013 gives us the opportunity to draw business lessons from the debacle in the hope that we may do business better ourselves.

We’ve written a great deal about Fresh & Easy, and you can review these articles here.

To our regular readers, the failure of Fresh & Easy will come as no surprise. But it is a surprise in this sense: When we initiated our analysis of Fresh & Easy, we were told, more than in any other situation, that Tesco would get it right. The more we pointed out that they got it wrong, the more we were assured that we were underestimating Tesco.

So here is a large, well-capitalized organization, widely respected for acumen in retail and its ability to work cross-culturally, working on a high priority project… yet it just blew almost two billion dollars and had a very high profile failure.

Why did it fail? What lessons can be drawn from this failure? Let us count the ways:

1) Don’t Let Investment Bankers Dictate Your Strategy.

The initiative to open in America came from the City in London (that is London’s Wall Street) warning Tesco that it was starting to grow substantially in developing countries and that as a larger percentage of sales and earnings came from developing countries, Tesco’s price/earnings ratio would decline.

The City thus was urging Tesco to move into the United States as this is the largest developed market in the world. Further, because both Marks & Spencer and Sainsbury’s had failed in acquisitions in the US, Tesco was told that an acquisition would not be well received.

In one of the statements that Tesco CEO Philip Clarke made explaining the decision to pull back from the US market, he said:

Launching Fresh & Easy in the world’s most competitive retail market was never going to be easy, but the economic backdrop made the task twice as hard.

As Chief Executive of Tesco, I have to focus on those markets which can deliver the high returns which our shareholders rightly expect. Where they don’t, it’s my job to take action, as I did when we pulled out of the Japanese market earlier this year. These decisions aren’t easy, but making the tough calls at the right time is a vital part of the Chief Executive’s job.

Having assessed its long-term potential, we’ve concluded that Fresh & Easy is not going to achieve the scale and profitability it needs in a reasonable timescale.

The truth, though, is that precisely because the US is highly developed and “the world’s most competitive retail market,” there was never a likelihood that it would be one of those “markets which can deliver the high returns which our shareholders rightly expect.” Even if successful, it was going to be only modestly profitable.

This is a case where the operational activities were dictated by non-operational considerations. This is the kernel from which the later failure would grow.

It has been pointed out that Tesco did extensive consumer research, even living in the homes of Americans to understand their eating and shopping patterns. This is true, but the early-stage research that led to core decisions, such as the size of the store, was constrained by Tesco’s situation.

Tesco is a very large company. It needs to do things on a large scale or they are probably not worth doing at all.

Since the decision had already been made that Tesco had to open in America and that Tesco could not do an acquisition, the researchers and consultants were constrained in their recommendations. Had they decided that what Americans truly want is to buy food in 70,000-square-foot boxes on prime suburban corners, this would have been a grave problem for Tesco.

These locations are all taken. The little new construction that exists for these types of locations would find Tesco in deep competition with every supermarket chain in each city. It would probably take a century for Tesco to acquire a critical mass of these locations without an acquisition. So it would have been unacceptable for the researchers and consultants to recommend this option.

Equally, had the researchers decided that what Americans really wanted was to buy their food in one-stop-shop supercenters of 200,000-square-feet, similar to the Wal-Mart box, Tesco would have found this problematic. After all, every time anyone proposes to build such a box, they get a lawsuit; they get extended zoning negotiations; they run into legal obstacles, etc. Once again, to build a critical mass of these stores would take a very long time.

In light of these constraints, it is not surprising that the researchers and consultants came to the conclusion that Americans did not, in fact, want to buy food from stores on prime suburban corners, nor did they want to buy food in large supercenters. Instead the researchers concluded that Americans wanted to buy their food in old Rite-Aid drug stores!

These 10,000-square-foot locations had the advantage of being widely available, and developing them did not pose the legal and zoning problems of more conventional locations. But it is easy to identify a hole in the market. The question is whether there is a market in the hole. There was never any evidence that the mass of Americans were actually looking for this small footprint option.

Here, Tesco so leaned on its researchers that it never really got the truth. It just got the truth it wanted.

Before Tesco opened one store in America, it built a massive distribution center, brought in a large staff of expatriates to manage the operation and enticed key British vendors to build US facilities.

This created tremendous overhead, which created tremendous pressure to open stores quickly, which, in turn, created tremendous pressure to accept sub-par locations.

In a developed market, the limited availability of prime sites is a natural constraint on growth. What you want to do as a retailer is establish strict criteria for your locations: How much foot traffic? How much auto traffic, population density, disposable income, etc. These tough standards mean that you will turn down almost all the locations that come your way. It also means that you will accept only locations that are likely to be profitable.

Fresh & Easy was caught at birth between a rock and a hard place. If it grew slowly, accepting only the best locations and gradually learning from shoppers what worked and didn’t, it was destined to lose a fortune because it had to support this enormous infrastructure it had developed before opening the first store. On the other hand, if Fresh & Easy pushed to grow rapidly, to quickly achieve a scale that could support the infrastructure, it would be forced to accept loads of rotten locations.

Tesco put itself in a “heads you win, tails we lose” situation.

Contrast this with the approach Wal-Mart took when it opened its first supercenters. It contracted with wholesalers and various intermediaries to manage its food supply chain. Possibly Wal-Mart overpaid a little on a case-by-case basis, but the company freed itself to grow at a pace dictated by store performance and site availability.

Wal-Mart also postponed major capital investments in distribution facilities until the company actually knew what was needed.

This failure of Tesco to maintain flexibility doomed what was really a small start-up retailer.

4) Maximize Local Market Knowledge By Using Local Executives And Vendors.

If you are opening a retail store in a developing country, you will need a great deal of expatriate labor. This is because the personnel available in the country do not have the skill-set trained to do things such as food safety or to implement sophisticated supply chains.

If, however, you are opening a chain in an advanced western society such as the United States of America, you want to tap into all the local market knowledge and experience.

You want buyers who know the vendor community, real estate people who have relationships with developers and know the neighborhoods like the back of their hands. You want vendors who are tapped into what is selling around the country.

We can understand that a company might like to send one of its own over as Chief Financial Officer to watch the money, but other than that, there was really no cause to have any British executives in the US.

Equally, pushing UK suppliers to open in the US was counterproductive. At an early stage in the Fresh & Easy adventure, we ran a letter pointing out that the first Fresh & Easy stores devoted 25% of its fresh-cut salad assortment to watercress-based salads.

These are, of course, very popular in the UK, but are virtually never eaten in the US. Indeed neither Fresh Express, nor Dole, nor Ready Pac even produced such a product in their extensive lineup of salads.

Fresh & Easy management knew this, of course, but they didn’t know it in their bones, and their lack of local knowledge — at the processing level, at the procurement level, at the merchandising level — all led to the creation of stores that were not in sync with American expectations and thus were likely to fail.

There was also more than a bit of arrogance here — “We know what those Americans should be eating!”

5) Remember That Equity In The Marketplace Is Typically Built In Stages.

When Bruce Peterson launched Wal-Mart’s produce program, he had already been instructed by none other than Sam Walton that he should realize he was building a program for what would become the world’s largest grocer. Yet, he approached the task with humility. Bruce recognized that Wal-Mart, though well known for general merchandise, had no equity with consumers on fresh produce, so he resolved to carry well-known and respected produce brands. In other words, he wanted to borrow the brand equity of his vendors to woo consumers.

It would be hard enough for an unknown brand such as Fresh & Easy to tempt consumers to its stores; Tesco compounded this by stocking the stores with unknown private label product.

Even if the ultimate plan was to sell mostly private label, it would have been wiser to open the stores with all or almost all branded product. If the shelves were stocked with well-known brands and Fresh & Easy was able to offer a value proposition — more convenient stores or lower prices — it would have had much more business.

True, the low-price strategy might not have been profitable, but neither was having a lot of product that didn’t sell very much.

If Fresh & Easy had lots of customers buying a bit too cheap on Heinz ketchup and Best mayonnaise, then in time Fresh & Easy could have introduced these customers to more profitable private label items.

Yes, Trader Joe’s is almost all private label — but they didn’t introduce their first private label item — granola — until five years after they opened, and the private label assortment as it exists now has developed with over 40 years of consumer input.

Tesco tried to do too much at one time.

6) Don’t Start Out By Creating Reasons For Consumers Not To Like Your Business.

Fresh & Easy opened without accepting American Express or manufacturer’s coupons, or allowing for standard check-out. Doubtless there are real reasons why Tesco felt these would not ultimately fit with its concept. Once again, though, the smart thing would have been to meet the competition on all these aspects and then reassess once Fresh & Easy had won over customer loyalty.

So, maybe AMEX charges an extra point over Visa. If certain consumers prefer to use the card, and perhaps the business model won’t allow for that extra point, still you open up accepting it, let lots of customers who prefer AMEX switch from Vons or Ralph’s or Whole Foods and consider that extra point marketing. Then when you have them as customers, you either renegotiate with AMEX or ultimately phase out AMEX — but you do that after the consumers love you.

Some decisions are hard and some are easy — if you want to know what credit cards to accept when you are entering a new market, the answer is easy: you accept every card your competitors do and if you can take an extra one, that is even better.

Tesco acted as if it were Tesco in the UK — already very successful — rather than acting as if it was a nobody in the US scrambling to gain a foothold in the market.

7) Be Nice!

Few people or businesses succeed all alone. One never knows who will be able to help or when they will be able to help. As such, it is prudent to make the small gestures of comity to the vendor community even if, at that moment, you have no particular plans to use that vendor.

In the early days of the venture, Tesco’s behavior can only be described as downright rude and offensive. We were getting phone calls from the owners of key grower/shipper organizations asking us if we could hook them up with the right person at Fresh & Easy. These were the top two or three vendors in their products and the kinds of reputable growers and shippers that, almost surely, Tesco would have wound up dealing with if its venture in the US had even the slightest success.

But these owners and CEOs were literally treated as if they were persona non grata. Simple questions — who is going to buy the lettuce — were met without a response. Important people were insulted and told to drop off their brochures at an office and that Tesco would call them if they were interested.

Once the project got under way, many of the buyers were profoundly offensive. We wrote a piece here about how a buyer rudely ordered expensive wine at a vendor event and refused to pay for it, despite promising to do so.

If you are the biggest buyer in the country, as Tesco is in the UK, you can get away with a lot, but if you are a struggling nothing, as Fresh & Easy was in the US, then building positive relationships is a key job.

There was this unwillingness to conform even temporarily to American customs. For example, Tesco was asked by many vendors to join the Produce Marketing Association, the United Fresh Produce Association and the Fresh Produce and Floral Council, and we pointed out in many pieces, including this one, why this was a good idea.

Partly this was substantive; Tesco might have learned from participation in these organizations and found sources for new employees and vendors.

Mostly though, the problem was a cultural one in which Tesco wished to impose its standards on America. Instead of saying cum Romano Ramanus Eris — when in Rome do as the Romans do — Tesco wanted to change American habits and customs.

It is not really very difficult. If we were to open a chain in the UK, we would ask what associations do Tesco, Sainsbury’s, Marks & Spencer and Asda belong to and we would join as well. Maybe, after we were well established we would find we weren’t getting value and quit, but initially we would want to be seen as the civic-minded guy supporting industry institutions.

In the end, Fresh & Easy had few friends who were motivated to save it — that may well be why it was not saved.

By the way, the same rudeness was exhibited to reporters at major consumer newspapers and TV stations. We got calls from many asking why Fresh & Easy and Tesco executives wouldn’t return phone calls. We could say the behavior was rude, and it was, but mostly it was stupid. These reporters influenced the prospective customers and they never gave Fresh & Easy the kind of glowing response that would have helped the chain. That may well have been because of how these reporters were treated.

8) It Was Not Fresh And Not Easy: Make Sure Those Who Are Executing Based On Research Understand What The Consumers Were Saying.

Consumers say many things, but it requires great expertise to actually interpret those proclamations. So, for example, consumers might say they want Idaho potatoes for dinner but knowing that doesn’t tell us whether the consumers want a potato grown in the state of Idaho or, simply, a long white baking potation.

Yes, consumers wanted things fresh, but the execution delivered product that Americans did not perceive as fresh. Generally speaking, Americans perceive things as fresh when they are A) variable and, if appropriate, B) cooked at the location and served warm.

In other words, no matter how high the quality of the bread, meat and cheese, Fresh & Easy’s sandwich program would be perceived as vending machine food because the consumer could not customize the sandwich. At most supermarkets, the consumer can say, heavy on the mayo, an extra slice of provolone, some jalapenos, please, etc.

Same thing with rotisserie chicken. In most stores, a consumer sees it cooking, smells the aroma and takes it home hot. At Fresh & Easy it was cooked in a distant commissary, served cold in a plastic bubble.

Tesco knew the consumers wanted fresh, but it delivered an experience that Americans would not perceive as fresh.

Similar confusion exists over the term easy. It seems that Tesco leapt to the conclusion that small would equal easy. It turns out that this is true for only small subsections of the population — notably students and elderly people or urban dwellers who do not have a car. For most shoppers, as Kroger CEO David Dillon caught on right away, a small store that carries mostly private label product was simply an additional stop for the typical suburban mom. It was not easy; it was hard because now the kids had to be dragged to another store, unbuckled from their car seats, etc.

So Tesco knew consumers wanted “fresh” and that they wanted “easy,” but they didn’t understand what American consumers meant when they used these terms.

9) Don’t Be Logistics-Driven; Be Merchandising-Driven. Either Open Stores Only Where The Demographics Suit Your Concept Or Customize Merchandising Assortment To Meet The Needs Of The Local Community.

Inconceivably, the decision was made to offer a uniform merchandising assortment against diverse demographics. So the store in upscale Scottsdale, Arizona carried exactly the same assortment as the one in Compton, California. This guaranteed poor results.

This is a big, diverse country. Get lazy on assortment, and you might as well close up your doors. Which is, of course, what Fresh & Easy is doing.

10) Don’t Fall In Love With Your Technology.

In the early days, Fresh & Easy was plagued by out-of-stocks. It was believed that this was due to a sophisticated ordering system that was functioning poorly due to a lack of historical data. But Fresh & Easy only had a few dozen stores at the time. One vendor suggested that Fresh & Easy equip each store with a clipboard and have the store manager call in all the out-of-stocks every day so they could be delivered the next.

This eminently sensible suggestion was treated as an insult to Tesco’s IT department, and the stores struggled through months being out of stock on lots of stuff. This not only cost business but alienated consumers at a crucial moment. There are few things more frustrating to a consumer than going through the effort of taking a trip to a store and that store not having product it would normally be expected to have. That certainly makes shopping hard, not easy.

There are many reasons Fresh & Easy’s sales never took off, but the fact that the chain alienated so many customers with out-of-stocks in its early days may play a greater role than is realized.

Tesco has enormous resources. It could have made sure there were no out-of-stocks. It could have sent a regional manager to every store every morning and then load a minivan at the DC to quickly stock up. But Tesco was so focused on its systems, the company forgot about the customers. That can easily be the kiss of death for a retailer.

11) Allow Your Own Team To Weigh In.

There has been much written about Tesco’s unwillingness to trust outsiders and thus the bizarre decision to bring in so many Tesco executives to work at Fresh & Easy.

What is less realized is that Tesco didn’t actually trust its own senior staff. As the interest in Fresh & Easy grew, we started getting phone calls from senior Tesco executives. These people were the chief executives for Tesco’s operations in various countries.

They wanted to question us on Fresh & Easy. When we inquired as to why such a senior Tesco executive would need to call the Pundit to get information on Fresh & Easy, it was explained to us that information on the project was shared on a “need to know” basis, and since they didn’t “need to know,” they were told almost nothing.

The problem with this is that these were very astute people with great expertise in retailing, and they had no vested interest in the decisions that had been made regarding Fresh & Easy. Had Tesco been open to the constructive critique of its own staff, there might well have been enough of a counter-weight within Tesco to question some of the decisions being made and thus obtain a better outcome.

12) Don’t Abuse Your Business Partners.

Fresh & Easy made a big point of selecting individual vendors to lead various categories, and there were specific and unusual requirements ranging from how much a clamshell of grapes should weigh to the measurement of an artichoke stem.

Most of these requirements were silly because they did not add value that the consumer perceived, but they did add expense.

In addition, these exacting requirements constrained the supply chain and thus precluded Fresh & Easy from taking advantage of ‘special buys’ that become available due to market conditions.

Still, this was the decision Fresh & Easy made and, perhaps, working closely with a limited number of excellent vendors would lead to success.

Except when times got tough and Fresh & Easy wanted to offer value items, it abandoned its vaunted specifications and bought product on deals. Now Tesco didn’t sit down with its selected vendors, explain the situation and offer them an opportunity to provide standard product at a lesser price. Tesco just went around their backs and bought product.

We were touring more than a few stores with vendors when they would be shocked to see a skid of competitors’ product on the floor when, supposedly, they had an exclusive.

For the most part, this made the vendors hate Wild Rocket and Fresh & Easy, and when one is in trouble, one needs friends. Fresh & Easy didn’t have many.

13) Don’t Fake Your Liabilities And Thus Underestimate The Risk You Are Taking.

One of the reasons Tesco got in so deep is it pawned off on vendors many of the costs. If this were legitimate, it would constitute risk-sharing and might have been a wise strategy.

But, in fact, when the business turned out to be too small to support the British transplants, Tesco bought them out at a huge premium to free market value. We ran a piece here, in which we pointed out that this seemed to likely be the result of an agreement, either explicit or implicit, that Tesco would make these guys whole.

Because Tesco is so large, these things get lost in the shuffle. Had it just been Fresh & Easy doing this, shareholders would have filed suit claiming that management had taken on liabilities that were not properly disclosed.

Another question is whether these potential liabilities were disclosed to Tesco’s own board of directors? Maybe not and, as such, the board was kept in the dark about the extent of the investment the Fresh & Easy project would entail.

No board is better than the information it has, and it is difficult to make wise decisions if liabilities are being assumed based on a wink and a handshake.

14) Secrecy Is No Substitute For A Competitive Edge.

Many of the difficulties Fresh & Easy experienced came about because of the attitude expressed by then Chairman Sir Terry Leahy when at the launch of Fresh & Easy he expressed that “this is a roll-out, not a trial.”

It was always an odd way to proceed. Few retail concepts spring from the minds of geniuses and proceed to serve the consumer in an unaltered state. Much more common is for retailers to launch concepts and to refine them based on consumer feedback. What sells? What doesn’t? What do people ask for?

But Fresh & Easy was reared in secrecy, researched in a mock store built on a sound stage. Then, it was sprung to life, fully formed and rolled out.

There were enormous efforts made to keep things secret, including mock names and no prototype store open to the public.

Self-confident retailers don’t worry all that much about secrecy because they believe they have a competitive edge in what they do.

Look at Wal-Mart’s launch of the supercenter. The company opened one store. The whole world came to see it — every retailer of any size — and whatever these retailers learned from visiting that initial supercenter had virtually no impact on Wal-Mart’s ability to grow the concept.

Indeed, long after it became clear that supercenters were a very successful concept, most retailers did almost nothing. Kroger bought Fred Meyer, but did not attempt to roll the chain out nationally. Nobody bid sufficiently aggressively to acquire Meijer. And major retailers such as Safeway did not develop a supercenter concept.

Obviously, Wal-Mart believed it had had significant competitive advantages in developing supercenters, and the behavior of other retailers in not developing their own such concepts indicates they were correct.

The very fact that Tesco thought secrecy was so important in launching Fresh & Easy was a sign that the concept was weak. If it could be so easily copied, then it would be copied if Tesco had the slightest success.

Indeed, the failure of Fresh & Easy turned out to be a matter of lack of demand. But it could have been a failure in another way.

If by some miracle Tesco had discovered some hitherto unknown demand for purchasing groceries in 10,000-square-foot boxes, the very availability of such real estate would likely have led to an explosion of such stores.

The competition would have been intense because it would not have been restrained by real estate and zoning issues. In addition, such small stores could be opened at a reasonable cost and so individuals of all ethnic groups might jump into the fray.

In fact, such small stores, if successful, might not be profitable for a large corporation to operate at all.

The bottom line is that, in retail, if you believe your concept is so easily duplicated and your edge so weak that knowledge of your concept would allow others to dominate the field, that is a good sign that it is not likely to be a highly profitable concept.

15) Make Sure You Have The Right Person For The Job.

Tim Mason was widely heralded as a genius when Tesco sent him over to the US to head up the launch of Fresh & Easy.

He was held in such esteem, however, principally for his development of Tesco’s loyalty program.

This program was not available for Tesco to use in the US, because it was developed with Dunnhumby, with whom Kroger has an exclusive in the US. So the very tool which was supposedly crucial to Tesco’s UK success was not available for use in the US, and no substitute was ready for opening.

But there was also a question, brilliant or not, as to whether or not Tim Mason was the right man for this job.

Part of the issue was experience. Whatever his achievements, he had never opened a supermarket chain or any business. He was a high-end corporate executive sent to do what was, really, just a start-up.

And he seemed to have a tin ear for how things were perceived. Everyone who dealt with him had the same comment when they spoke to us: He was always out on a yacht enjoying southern California. They always had to reach him on the boat.

This was a guy running a struggling start-up. This requires super-human efforts of all involved and tremendous self-sacrifice. It requires leadership that sets a standard for hard work and deferral of gratification. At very least, it requires leadership that has the good sense to keep to oneself your extravagances.

And everyone kept talking about Tim Mason and the yacht in the same sentence. That can explain the failure all in itself.

16) Compensate People To Achieve The Goals You Want Them To Achieve.

When Tesco decided to send its dream team to America, it had an opportunity to set up a compensation plan.

It was elaborate and complicated. It involved giving Tim Mason a 2 million-share grant in 2007 under the United States Long Term Incentive Plan, which ultimately lapsed when he was given broader corporate responsibilities and withdrew from the plan.

He did receive a £4.3m payout in 2011, which led to great criticism since Fresh & Easy was such a failure.

And he will receive £5.7m following his departure, plus a £9m pension plan.

We begrudge no one their income, but we do think that compensation plans focus the mind on achieving different goals.

Mr. Mason was a rich man before he came to America, and if the offer made to him was that he would have the opportunity to work for $1 a year but would receive 20% phantom equity in the Fresh & Easy project, the results might have been different. For example, if in 10 years’ time, an appraiser would value the company, or a formula for valuation would be agreed to now, and Tesco’s investment, including an agreed return on investment, was deducted and Mr. Mason would be entitled to a payoff equal to 20% of the value he created by building the chain, we suspect the whole project would have been done differently.

There would have been a desperate attempt to reduce Tesco’s capital investment because that would have been a key criterion in the personal return Mr. Mason could earn. We doubt that distribution center would have ever been built.

As it was, the compensation program was a sort of guaranteed high base with an extra bonus if things go well.

Had Mr. Mason been looking at years of working for a $1 a year with no return, he would have been less likely to allow the project to fail in the way it did.

17) Make Sure Your Promotions Attract The Kinds Of Customers You Hope To Keep.

The general rule in consumer marketing is that your efforts to get new customers need to match your efforts to retain them.

So magazine subscribers who purchase through sweepstakes typically renew best through sweepstakes.

Equally, when a retail business is confronted with a lack of customers, the thing to remember is that you need to promote in line with the kind of customer you hope to ultimately attract.

Fresh & Easy decided to heavily use dollars-off coupons. There were many variants, but a typical one was a $5 off each $20 purchase.

The hope, of course, was to introduce consumers to Fresh & Easy through the discount and then have them stay on as customers at regular prices.

In fact, the coupons became like crack/cocaine. They would boost sales but as soon as Fresh & Easy stopped couponing, it was like withdrawal symptoms — sales would crash.

The food is the cheapest thing, so normally promoting with discounted food can make sense — but you will attract customers who are focused on discounts. To keep those customers, you need to remain deeply promotional.

But we never found Fresh & Easy to be particularly well-priced. When we did our PRODUCE BUSINESS Wal-Mart Pricing Study in Los Angeles, California, we studied their pricing and it turned out that Stater Bros, Ralphs, and Vons plus Wal-Mart were all less expensive then Fresh & Easy when it came to fresh produce.

This being the case, deep discount couponing only brought in customers who would be dissatisfied with Fresh & Easy. They would have been more successful deciding who the customer was going to be and skewing the marketing to that person. Were they looking for Moms? How about a program where 2% of your purchases go to the school you specify?

Or maybe the money needed to be spent on a comprehensive image-building campaign to tell people what Fresh & Easy was all about. In the end, as at the beginning, this was a mystery to most consumers.

18) Know Your Center.

One of the more consistent critiques of Fresh & Easy is that its stores were cold and institutional. This contrasted especially with Trader Joe’s, whose stores are warm and give its shoppers a real sense of place.

Fresh & Easy tried to address this problem with a new décor package, but it didn’t make much difference.

The stores lacked sense of place because management never knew what they wanted the store to be. This is mostly because to decide would have been to exclude. In other words, if you go to an Aldi and complain that the produce is dishelved because they put it out each day and let it run down, they don’t apologize and try to make it better. They tell you to come at 8:00 AM when it is just put out. If that doesn’t work for you, they suggest you find another store.

That attitude — that fierce dedication toward discounting — informs the entire shopping experience. Trader Joe’s, with its Trader Shtick, has a similar rootedness. Fresh & Easy was unwilling to say that anyone shouldn’t be their customer. That is why, in the end, nobody will be their customer.

19) Don’t Kid Yourself As To The Source Of Your Problems.

Throughout the experience, Tesco has consistently blamed the economic crisis of 2008 and its aftermath as the cause of its problems with Fresh & Easy. This has never been true and never made much sense.

One thing Tesco has is financial resources. This means it has an enormous edge over businesses that do not have resources during a financial crisis and depressed economy.

A recession makes available locations and talent that would not normally be available. It would normally be an excuse for a company such as Tesco to put pedal to the metal and drive poorly financed independents out of business.

What is required, of course, is a viable concept.

We used to think these pronouncements were just sop for the shareholders, but, more recently, we came to think that top Tesco executives actually believe that had the economy been stronger, this concept would have succeeded — despite there being no basis for such an assumption.

The power of self-delusion is a major fog preventing business success.

20) Be Open To Criticism And Avoid Groupness.

Of course, all of the first 19 points we mention as reasons for the failure of Fresh & Easy beg one question: Why didn’t they fix it?

Mistakes happen, errors are made, generals always fight the last war — but these were smart people, with enormous resources and the really interesting thing here is that they didn’t turn it around.

Why? Well the obvious answer is that they were unwilling to listen to criticism.

We wrote a lot about Fresh & Easy, and the pieces were very well received, not only amongst our core industry readership but beyond. We were invited to speak on the BBC — in fact we were invited to debate with Tesco but Tesco declined. We were quoted in more than 100 media outlets.

But there was a more serious side. We were paid by many of the world’s top investment banks to give our analysis of the situation. Citicorp had us do a conference call with its investors around the world to discuss Fresh & Easy. It also had us keynote its European Retail Conference for the same reason.

Several of Tesco’s biggest competitors brought us in as a speaker to address the top management team and, in some cases, even the board of directors, on Tesco and Fresh & Easy.

On more than one occasion, Tesco vendors approached us and asked if we would be willing to address various Tesco meetings, as they wanted Tesco to succeed and thought our critiques had been prescient so they wanted to suggest us to their Tesco contact. We agreed each time. Yet the invite never came.

We mention all this to point out a few things: First, our analysis was very credible and taken seriously by very serious people. People who had millions riding on Tesco stock, vendors who had millions in business riding on the success of Fresh & Easy; journalists who had a choice of analysts to speak with. Since we were almost exactly correct on almost everything, we repaid this trust in the best possible way.

Second, we had real influence. People bought and sold Tesco stock based on our conference calls and our analyst meetings.

For both these reasons, it was peculiar and telling that the one group that never reached out was the management team at Tesco and at Fresh & Easy.

At very least, their purpose in reaching out would be to co-opt us, build personal relationships, etc., in the hope that we would be more generous in our assessment.

More importantly, they — and this applies to the California-based management team, the executives in London who were supervising this project and the board of directors that was supporting and funding it, would actually learn something and thus head off disaster.

Why they did not is best explained by a phenomenon that psychologists call “groupness,” which is explained in a great essay in the National Geographic Blog — much of it focusing on why A&P couldn’t sustain its leadership position and why NASA had the Challenger and Columbia tragedies:

Behavior like that, seemingly contrary and nonsensical, stems at least in part from a phenomenon that psychologists call “groupness.” Coined by a social psychologist at Oxford University named Henri Tajfel, the term refers to the tendency of various animals, including humans, to form in-groups.

When the in-group encounters individuals from outside the group, the default response is hostility. People protect their group from outsiders and from outside influences. For example, we will reject information, habits, and culture from other groups.

The power of groupness is not to be underestimated. If a group invests a lot of effort in a goal and succeeds, its boundaries become stronger, and it tends to become even more hostile to outside influences. This may not be overt hostility. It may simply be a subtle and unconscious tendency to reject anything from another group.

NASA has lost two space shuttles, costing the lives of 14 crew members, and groupness was at least partly to blame. The astounding effort and success of the Apollo program had created a culture… NASA defined itself as technically excellent — “the perfect place,” as one researcher called it. They put a man on the moon, and it was hard to argue with success. The insidious message was: We know what we’re doing. The corollary to that is: You can’t tell me anything I don’t already know.

By the time components of the space shuttle began failing (the O-rings in the case of Challenger and the foam insulation in the case of Columbia), NASA managers were so blinded by groupness that they could not recognize that those malfunctions were clear signs of impending disaster.

The official report on the crash of Columbia said, “External criticism and doubt . . . reinforced the will to ‘impose the party line vision on the environment, not to reconsider it . . .’ This in turn led to ‘flawed decision-making, self-deception, introversion and diminished curiosity about the world outside the perfect place.’”

This is another reason why sending all these Tesco folks over to America was a bad idea. They believed in themselves too much; they had a record of success together. Had the team been an American team, the Americans would have been more skeptical of British orders and the British executives would have been more skeptical of the American’s claims to success.

In any case, mistakes can only be corrected if one is open to the possibility that one has made mistakes. This team was never open to that possibility and so never heard the voices that were ready to help.

One way of avoiding this is through staffing, as we mentioned. It also why some people, even if they have sufficient resources to fund a project, prefer to bring in a bank or a partner. They are more likely to question assumptions and challenge non-performance.

We were sometimes accused of being Tesco’s enemy. But that was always silly. We were just an analyst. The vendors we knew all were desperately hoping that Tesco would succeed and thus create a new market. Many had visions of tying their wagon to the Tesco star and making their fortunes just as many did with Wal-Mart a generation earlier.

They may have perceived us as an enemy, but we were the most valuable kind of friend. The one who told them the truth.

Perhaps the very best business lesson to learn from the failure of Fresh & Easy is to remember the plea sent by Oliver Cromwell to the General Assembly of Kirk, in which he famously said: I beseech thee, in the bowels of Christ, think it possible you may be mistaken. Possibly the best business advice ever written — and by a Brit! Though the General Assembly paid no attention either.

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As we consider these 20 points as lodestars to avoid in our own business affairs in 2013, we also think it worth making one point about sustainability. One of the reasons Fresh & Easy made few friends is that it was so sanctimonious on its claims of sustainability.

It put polar bear pictures up in each store as we wrote about here, and claimed it would pay people better and provide health insurance, etc. It was never clear it did anything more sustainably than anyone else but, even if there was such evidence, the potential closure of Fresh & Easy shows that they were not sustainable at all.

Surely it will be no solace to those who lose their jobs that if Fresh & Easy had managed to stay in business, it would have saved some polar bears or paid a higher wage.

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So what does Tesco do from here with Fresh & Easy? Four possibilities: Stay, sell, merge or franchise:

STAY
There is an off chance that the assessment being undertaken could lead to a decision to stay in the US. If so, our advice would be as follows:

1) Close down and write off the DCs — both the functioning one in El Segundo and the mothballed one in Stockton. Send back all the expatriates to the UK. Kill any private label product that is not already being produced for Tesco elsewhere. Without this overhead, there is a shot. We would do logistics with someone like CH Robinson. Own as few assets as possible, have as small a staff as possible.

2) There are a lot of people that can be hired. The logical people are grocery folks… Cathy Green, formerly of Food Lion, comes to mind, but this is a Hail Mary pass based on the primacy of fresh, so we would probably make Bruce Peterson CEO as he combines experience with regional retailing – Meijer’s, Baker’s etc., with the ability to know how to interface with a global giant due to his Wal-Mart years. Maybe partner him by seeing if we can woo Tim Riley from Giumarra to be COO, and bring Dick Spezzano on as a local consultant. But we would keep the team ultra tight.

3) A lot of stores will have to close. We don’t have the store-by-store data to make that decision here, but basically, either close the Arizona and Nevada divisions and focus in on California or kill off the lowest performing third.

4) We need a new concept. At an earlier date, we suggested abandoning Fresh & Easy and converting the stores, based on their locations, to either Aldi clones or Trader Joe’s clones. That is still optimal, but if we want to have one concept to start, doing a deep discount format is easier than replicating Trader Joe’s. It is relatively easy to under-price people — all that it takes is a willingness to lose money, which Tesco has shown an ability to handle. With the store base cut and the overhead gone, undercutting prices won’t affect Tesco earnings by even a quarter of a percent. In contrast, ongoing losses of the present operation could have run around 3% of earnings.

SELL
Easy to say, but who would buy? Many purchasers would want a check on liabilities related to the leases as well as the taxes and maintenance on the distribution and food processing facilities.

1) Wal-Mart would take the whole operation. It would want a fire-sale price — but everyone will because, well, it is a fire sale. More specifically, only about 30 of the stores are profitable, and we have doubts about those numbers. The big distribution and food processing facilities are very specific to Fresh & Easy’s needs and will only be partially used by a buyer or will require significant investment to normalize them.

Still for Wal-Mart, with its small store Wal-Mart Express concept and ambitions to grow in California, and the fact that the whole thing on Wal-Mart scale would be a trial, not a roll-out, the company would be interested. Plus Wal-Mart would relish the headlines as it steps in and saves so many jobs, etc. Unfortunately the rivalry between Tesco and Wal-Mart around the world is so intense that some believe Tesco would burn each store to the ground before it would sell to Wal-Mart.

2) Any of the dollar stores, Aldi and Trader Joe’s would be interested in some or all the locations.

3) Kroger does operate C-stores. It has overlapping operations, so maybe for the right price, it would do a C-store play in the locations. The big problem is that nowadays C-stores that sell gas are the ones with the prime locations, so almost all of these locations are secondary locations.

4) Cerberus, or any of the other private equity groups or real estate trusts, would buy the sites to resell, maybe temporarily operating Fresh & Easy, where they are profitable. Sort of like Albertsons LLC. These stores don’t have to be food stores at all.

MERGE
1) The most logical merger would be for Supervalu to contribute its Save-A-Lot division, Tesco to contribute Fresh & Easy, have Tesco put in money to convert the Fresh & Easy Stores to Save-A-Lots and to fund the integration. The stores would have viable format and operational structure. We could bring back Mike Kemp in to help with the plan. It could be structured to give Supervalu some cash.

2) Tesco used to be partners with Safeway in an internet shopping service. The stores don’t work as standalone entities but we wonder if they couldn’t work as “Vons Express” stores to capture fill-in business in between trips to the larger grocery stores. Maybe Tesco puts in the real estate and some money for revamp and Safeway puts in its banner names, frequent shopper program, market knowledge and managerial skill — maybe something could work. Of Course, Safeway might rather let them crash and burn as there is usually no love lost when formers partners decide to compete with you.

FRANCHISE
1) How about finding someone to do the wholesaling and then selling each store to its manager or to local entrepreneurs? Just because Fresh & Easy only sells $50,000 a week at a particular store doesn’t mean that an individual operator can’t do a quarter million. They might work 24 hours, customize the assortment to the community, buy opportunities off the local wholesale market, etc.

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Our guess as to what will happen? Tesco will sell the whole thing to a real estate trust or private equity group based on the real estate, possibly with Tesco having to write a check to exit the market.

The problem is that the announcement has demoralized workers. The best people are leaving every day, theft is already almost certainly going through the roof, so they just need to exit and put this nightmare behind them.